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A Test of Neo-Fisherism: 1964–2019

Author

Listed:
  • Bias Peter V.

    (Florida Southern College, Barney Barnett School of Business and Free Enterprise, Department of Economics, Lakeland, FL, USA)

  • Hall Joshua D.

    (Florida Southern College, Barney Barnett School of Business and Free Enterprise, Department of Economics, Lakeland, FL, USA)

Abstract

Neo-Fisherism, the theory that monetary authorities should expect inflation rates to be positively and causally related to their targeted nominal interest rates, is reviewed and empirically investigated. Using several different measures of interest rates and inflation we analyze US monthly data from January 1964 to April 2019. Granger causality tests are performed in search of a Neo-Fisherist impact of interest rates causally impacting inflation or the reverse. The full period is reviewed and is also divided into three sub-periods: the period before the Federal Reserve targeted federal funds rate at 25 basis points (labeled here as the effective lower bound, ELB), the ELB period, and the post-ELB period. Prior to the effective lower bound, we find evidence largely supporting the classical view of causality from inflation to interest rates, however the relationship is bidirectional depending on the measurement of inflation and interest rates. During the ELB, we find moderate evidence in support of Neo-Fisherism. In this period, federal funds rate Granger-cause changes in inflation as measured using the CPI and Core CPI. In contrast, during the effective lower bound period, the standard classical result holds when considering the Shadow federal funds rate. In the period following the effective lower bound, the standard relationship is found as well, in which inflation granger causes movements in the interest rates. Overall, the results regarding causality between interest rates and inflation largely support the classical view of causality but are dependent on data measurements and the observed time period.

Suggested Citation

  • Bias Peter V. & Hall Joshua D., 2021. "A Test of Neo-Fisherism: 1964–2019," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 221-251, January.
    • Handle: RePEc:bpj:bejmac:v:21:y:2021:i:1:p:221-251:n:8
    DOI: 10.1515/bejm-2017-0234
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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